Financial journalist Trevor Sykes would frequently point out that the problem with lending to highly-leveraged companies is that you can effectively take on equity risk while only receiving a return on debt. The Queensland Government needs to avoid this risk when establishing a new royalties regime for first movers such as Adani in new mining regions. The Australian reports:
A compromise was struck between Queensland Premier Annastacia Palaszczuk and her deputy, Jackie Trad, on the deal that will be used as a template to lure other resources companies into the state’s burgeoning Galilee and Surat basins and the northwest minerals province.
The Australian understands Adani will be given the cut-price flat rate for up to six years — understood to be several million dollars a year — but it will be eventually required to pay the entire amount of deferred royalties owed to taxpayers for coal extracted at its proposed Galilee Basin mine.
Adani will have to pay interest on the delayed amount.
The State Government should push for more than a standard interest rate on debt and for as rapid repayment as possible. It should arguably receive an equity-like return in the range of 10 percent or more given the level of risk, including the not insignificant risk of the project eventually falling over and the Government receiving hardly any royalties income at all. Indeed, the head of the QRC Ian Macfarlane notes in the Courier-Mail today that he wants the government to have “some skin in the game.” In which case, I would suggest, the Government should earn an equity return, not just a return on debt.